Impressions

Saturday, March 25, 2017

A secret letter written by PM Narendra Modi to Congress VP
Rahul Gandhi soon after the recent five state elections has been leaked online. Here is the full text of the letter:

13th
March 2017

Dear
Rahul ji,

The
elections are over, and they have gone largely as per plan. Your efforts were
invaluable in Uttar Pradesh. Akhilesh beta
never realized that "Hand" is used to stop a "Bicycle", not to accelerate it
! But he is still young, will learn over time. In fact your efforts in U.P. were so effective
that there was also a strong rub-off on neighboring Uttarakhand. A big thank you
for this! We are also very happy with what happened in Manipur, where we were a
big Zero just five years ago! There was a slight problem in Goa, but I admit it
was all our own fault. Parrikar ji was not there, and our people were busy fighting
amongst themselves. However we have fixed that problem now, so don’t worry. Meanwhile,
you are free to imagine that it is the Congress who won the mandate in Goa and
Manipur. Victory - after all - is just a state of mind.

We
are however not at all happy with what happened in Punjab. This is a serious
matter. You should have campaigned more vigorously in Punjab instead of leaving
everything to Amarinder Singh ji. It seems you were focused only on Uttar
Pradesh. This is sheer negligence. Because of this, deadlines for Project “Congress-mukt
Bharat” will now have to be pushed forward to 2022. But it is okay this one
last time, we are letting you off with just a warning.

You
are now free to resume your foreign holiday. This is a good time to visit
Bangkok. It always is! You can plan for a visit to Europe too, but don’t, even
by mistake, go to the U.S.! I hope you remember what happened in 2001? Luckily
Atalji was able to help you that time, but this time we may not be able to do
anything. Trump Uncle is very strict. He may suspect you are there to sell
kitchen utensils, Made in Jaunpur, of course. So please take care.

Sunday, March 12, 2017

In an extraordinary move one fine
evening in November last year, Prime Minister Narendra Modi announced sudden withdrawal of 86% of India’s currency in circulation, in what he termed as a crackdown
on black money. In a predominantly cash based economy like India, it was an unprecedented
move and has no parallel anywhere in the world. While
the last word on “notebandi” has not
been said yet, several elections – both local bodies and states - since then confirm voters have not been averse to the action. This is in sharp
contrast to what was shown incessantly on electronic media during those
eventful days of acute currency shortages. Besides a verdict on demonetization, here are
some takeaways from recent elections in the country not just in the five states that went to
polls last month, but elsewhere as well.

The mainstream media has no touch with reality. I wonder how they
justify the crores they get as salary. For example, the sheer scale of BJP’s
election victory in Uttar Pradesh is mindboggling. Yet, throughout the election
campaign, the media painted a picture of a keen contest between the “UP ke ladke” Vs. Narendra Modi, with
Mayawati’s BSP thrown in for some additional spice. The media narrative portrayed
a largely equal fight, or occasionally an edge to the BJP depending on whom you believed. As if to justify prior coverage, the exit polls also
reflected similar trends, with BJP a bit ahead of the rest but not too much. But it
all fell flat when the results were declared. This is true not just for U.P. but
elsewhere as well. Recall that the non-stop coverage for more than a month of the poor
“suffering” in bank queues (some even died!) also turned out to be top class fiction. Clearly, if you are watching too
much TV, especially the newsroom debates & “expert” analyses, you are wasting
your time. Go, get a life.

There is no substitute for hard work. Narendra Modi’s charisma sits
on top of several decades of solid ground level work by RSS & several of
its affiliate organizations in the remotest corners of the country. You cannot
build a sustainable electoral model without some real groundwork & voter connect at the
grassroots. Mulayam Singh Yadav built Samajwadi
Party from scratch. He has spent his whole life in the rough & tumble of
U.P.’s realpolitik, connecting with people, building relations and nurturing
the party to what it is. In the 2012 U.P. State Assembly elections, people voted
for Samajwadi Party with “Netaji” in mind. But it was Akhilesh who was made the
CM. You can inherit party posts but not the personal
touch & rapport with the people. You have to build that yourself. Governing a State &
showcasing a couple of projects is one thing, having a grassroots level connect
with the people that makes them vote for you again & again is another. It is no surprise that cutting
across party lines, one can see that most second generation politicians are
failures.

There are no shortcuts to success, no substitute for real groundwork and people connect

Leadership matters.In Uttar Pradesh,Narendra Modi staked his personal
reputation at risk and led the battle from the front. There is no doubt that
BJP could not have pulled off such a huge success if Modi had stayed away from
campaigning or only made token appearances. Ideology has ceased to matter. Choosing your party is no longer a question of ideology you subscribe to. All parties call themselves socialist and secular. Nobody reads party manifestos. Even freebies have ceased
to matter, if only because everyone promises a bountiful of them, so the factor
gets neutralized. People want forceful, decisive
leadership.

There are no vote banks.The “secular” narrative is dead.Sixty five percent of India’s
population is below the age of 35. The median age of an Indian is 27.6 years. The
generation which saw Partition has passed away. To a large section of today’s
voters, even the Ayodhya demolition is “history”. And voters are no longer swayed
by what happened in history. The BJP has successfully shed its “communal”
label. Even Muslim attitudes towards BJP are changing. But like an Ostrich who
buries its head in the sand, the old generation “secular” politicians - most of
them past their retirement age - refuse to see this reality. Even the caste factor
is overrated. Just because one can generate caste-wise statistics and blabber some
nonsense, it does not follow that voters who cast their vote ‘vote their caste’. Even
where a correlation exists between the caste of the electorate & the
elected, it does not prove causation. I have not seen a single survey or
opinion poll which asked the voters why
they voted for a candidate they did, and majority of the voters pointed to
caste as the driving factor. No wonder sand it slipping from under
the feet of parties who thrived on such narrow agendas. In an article
three years back, I called such parties “Dodos of Indian Politics”.

Voters have become demanding.Television & radio has reached
every home. Internet penetration is increasing rapidly. Literacy has improved significantly
over the years. People are much more aware of what’s happening in & around
them. You just can’t take them for a ride anymore with empty promises. The
voters have become demanding, and politicians who fail to deliver get thrown
out. This is repeatedly getting proved one election after another, be it in
Nitish Kumar retaining Bihar, or the Akalis losing Punjab.

Despite its recent spate of
successes, even BJP cannot rest on its laurels. It will have to deliver
genuine improvements to the lives of the people. Otherwise the same fate awaits
them.

Sunday, February 26, 2017

“Reserve Bank extends EMI Holiday” screamed the newspaper early in
the morning of 22nd November 2016, amidst those chaotic days of Rs.500 & Rs.1000 "demonetization".
“RBI allows both individuals and firms
with loans upto Rs. 1 crore an additional grace period of 60 days to repay
dues”, said the paper.

...except that there was never any EMI holiday

“Demonetization: RBI gives small borrowers 60 extra days to repay
credit”, said another - a leading financial daily, “…small borrowers who have been facing the brunt of demonetization,
would get an additional 60 days to repay their credit, including agriculture
and housing loans”.

Similar reports were carried by
most newspapers that day, and repeated ad
nauseum by television channels for several days thereafter. There was
however one small problem – the news was completely wrong.

Most media houses wrongly reported the news

What RBI had said

What then had caused the press to
report something like this, which wasn’t true at all? The answer to this lay in
a circular issued by the Reserve Bank of India, put up on its website the
previous day. The circular, titled “Relaxation in Prudential Norms”, said “…it has been decided to provide an
additional 60 days beyond what is applicable for the concerned regulated
entity(RE) for recognition of a loan account as substandard in the following
cases…” and cited a wide gamut of loan accounts where this benefit will be
applicable. Read the full circular here.

The operative term here is ‘additional 60 days…for recognition of a loan
account as substandard’ which was misinterpreted to mean borrowers getting an
extra 60 days to repay their EMIs or other dues. In fact, the RBI circular clearly mentioned “…this is a short-term deferment of
classification…” and that this “…does
not result in restructuring of the loans”. Shorn of its jargon, this means
there is no change in dates when the borrowers have to repay, but if they do
not, banks can have an additional 60 days to do what they do when the borrowers do not repay.

Understanding NPAs

News reporters and financial
journalists aside, I have seen even analysts tracking the banking sector struggle with
these terms. When banks give loans, the loans appear on the asset side of a
Balance Sheet. A repayment goes on to reduce that asset, while a fresh
disbursement increases these assets. However, not all loans get fully repaid,
and occasionally a customer defaults. This leads to a capital loss for the
bank, as the assets have to be written off. To an extent, such losses are
considered ‘normal’ in the banking business, and prudence requires that banks
prepare for them well in advance. This is where ‘provisioning’ comes in.

Provisioning means banks booking
an ‘expense’ entry in the Profit & Loss account based on the expected
losses arising from such defaults. Provisioning reduces reported profits of the
bank and creates a capital buffer, which can be used when the losses actually
occur. The amount of provisioning to be done is prescribed by the RBI, and
depends on the ‘quality’ of the asset. The worse the quality, higher the
provisioning, since lower are the chances you will ever recover your money.

Asset Classification

This is where ‘Asset
Classification’ comes in. RBI requires banks to classify all loans in four
groups – Standard, Sub-standard, Doubtful and Loss. Initially, all loans start
as ‘Standard’. Assets under the other three categories are collectively called
“Non-Performing Assets” or NPAs. NPAs are loans where principal or interest has
not been received for more than 90 days beyond its due date. The RBI defines ‘Sub-standard’
as an asset which has remained an NPA for a period less than or equal to 12
months. After 12 months as an NPA, the asset degrades to ‘Doubtful’. ‘Loss’
assets are assets where the bank feels there is no hope of recovery from the
customer at all. If an EMI was due on 5th February 2017
and the customer failed to pay, the loan would become ‘sub-standard’ on 6th
May 2017 (i.e. 90 days after this date). Twelve months after this date i.e. from
6th May 2018 onwards, the loan will be called a ‘Doubtful’ asset.

Note the following peculiarities
in this:

1.A
loan does not become an NPA immediately after default. For 90 days, it continues
as a ‘Standard’ asset, though conventionally one is inclined to equate 'standard’ assets as those where the customers are repaying on time. Thus, given that demonetization was announced on the
evening of 8th November 2016, even an asset due on 9th November
and remaining in default would not become an NPA on 31st December
2016. And this even without taking recourse to the extra 60 days provided by
the above circular.

2.There
is no hard & fast definition of a ‘Loss’ asset, it is based on a subjective
assessment of the bank about the recoverability of the loan. In theory, a loan may
continue to be classified as ‘Doubtful’ for several years after default,
without ever being moved to ‘Loss’.

Why this classification matters is
that the ‘provisioning’ banks are required to do – which, as we saw is an
‘expense’ and hits the bank’s profitability - depend on the category of the
loan, progressively increasing as the loan moves down the quality lane from
Sub-standard to Doubtful and Doubtful to Loss. RBI even requires banks
to make provisioning on Standard assets.

Gross & Net NPAs

When banks declare their
financial results, the 'Gross NPA’ and ‘Net NPA’ levels of the bank receive a lot of
attention. The summation of assets under the category Sub-standard, Doubtful
and Loss – are called the ‘Gross NPA’ of the bank. If you deduct the amount of
provisioning done from the Gross NPA, the resultant figure is the ‘Net NPA’ of
the bank. But we have seen above that provisioning is an arbitrary number –
partly driven by a regulatory minimum, partly driven by the bank’s own
discretion. This makes 'Net NPA’ also an arbitrary number. ‘Gross NPA’
however is a much more tangible number – it tells precisely the amount of loans
overdue by 90 days or more. There is
no subjectivity around it.

The NPA figures are often quoted in
terms of percentages. When bank results are declared at the end of every
quarter, analysts look at the ratios ‘Gross NPA %’ and ‘Net NPA %’ to determine
the quality of bank's assets. Gross NPA % is calculated as ‘Gross NPA of the bank (as described earlier) divided by standard advances
plus the gross NPAs’ of the bank i.e. effectively the sum of all loans
outstanding as on the date of calculation. Net NPA% is calculated as the ‘Net
NPA of the bank (as described earlier) divided by net advances’ i.e. sum of all
loans outstanding less the provisioning for NPAs.

Note that only the absolute
change in the Gross NPA comes close to showing the true movement of NPAs of the
bank. And that too, with the lag of one quarter! That is, Gross NPA as of
end-December minus the Gross NPA as of end-September will account for fresh
defaults that have taken place in the July to September - and not the October
to December - quarter! Net NPAs are distorted by provisioning, and both the ‘percentage
ratios’ (Gross NPA% and Net NPA %) are distorted by the denominator. A bank can
issue fresh imprudent loans and inflate the denominator, thus showing low NPA%.
These fresh loans would become NPAs earliest only in the next quarter because
of the 90-day rule.

It’s not over yet. There are
write-offs too!

Even difference in Gross non performing assets
doesn’t tell the full story of bank’s NPA movement. NPAs are further impacted
by the assets “written off” during the period. And this figure may only be available
from the Annual Report once a year. Written off assets are reversed completely
from the asset book, reducing the Gross NPAs of the bank and the overall asset
base itself.

Coming back to RBI circular
mentioned earlier, all that the RBI said was that for loans with due dates
between 1st November 2016 to 31st December 2016; banks
have an extra 60 days – beyond the normal 90 - to recognize them as NPAs. They
would become NPAs only if they remain unpaid for 150 days after the due date
i.e. between 30th March 2017 to 31st May 2017
respectively, instead of 30th Jan 2017 to 31st March
2017. The asset classification and the amount of provisioning the banks have to
do, would be guided accordingly.

As far as the borrowers are concerned, there was no change
in their obligations to the bank; their due dates remained the same. There was
no “EMI holiday” nor any “extra 60 days” to repay their credit.